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NEW YORK (CNNMoney) -- U.S. stocks closed sharply lower Monday as simmering worries about Europe's debt problems boiled over, sending investors in search of safety.
The Dow Jones industrial average (INDU) slumped 131 points, or 1%, to 12,381. The S&P 500 (SPX) fell 16 points, or 1.2%, to 1,317. The Nasdaq Composite (COMP) tumbled 44 points, or 1.6%, to 2,759.
The selling was broad-based, with all 30 Dow components in the red. Caterpillar (CAT, Fortune 500), Alcoa (AA, Fortune 500) and Du Pont (DD, Fortune 500) were the biggest laggards on the blue-chip index.
Financial stocks also faltered, with shares of Bank of America (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), Citigroup (C, Fortune 500) and Goldman Sachs (GS, Fortune 500) all down more than 1%.
On Friday, rating agency Fitch cut Greece's credit rating by three notches to "highly speculative," putting it in junk bond territory. In addition, Standard & Poor's slashed Italy's outlook to 'negative' from 'stable.' The downgrades, combined with a weaker-than-expected reading on manufacturing in Europe, renewed concerns about the eurozone's debt crisis.
Furthermore, Spain's ruling Socialist party was hit with its worst election defeat in years over the weekend, as citizens continued to protest the weak economy and high unemployment.
All of that helped boost the U.S. dollar to a two-month high against the euro. The stronger dollar pressured prices for commodities that are priced in the U.S. currency, such as oil.
"Investors have realized that the European sovereign debt crisis is not over," said James Shelton, chief investment officer at Kanaly Trust in Houston. Add concerns about the U.S. economy and waning monetary stimulus, he said, "and you're seeing investors reduce risk."
Stocks finished lower Friday, as the dollar rallied on worries over Greece's debt.
All stock indexes are down more than 2% this month. Both the Dow and S&P have posted weekly declines for three weeks in a row.
Looking ahead, there aren't a lot of reasons for optimism. Investors seem to have taken to heart the old Wall Street adage of "Sell in May, then go away."
After a strong round of first-quarter corporate earnings, investors are turning their attention to the outlook for the global economy, said Kevin Rendino, senior portfolio manager at BlackRock.
"We're entering one of those horrendous macro periods," he said.
Investors are also bracing for life without the billions of dollars the Federal Reserve has been pumping into the economy. The Fed's quantitative easing program is set to expire in June.
The U.S. housing market could be in focus early Tuesday, with the government's montly report on new home sales expected before the market opens. Later in the week, investors will take in a revised reading on second-quarter U.S. gross domestic product.
World markets: European stocks sank. Britain's FTSE 100 dropped 1.7%, while the DAX in Germany tumbled 2% and France's CAC 40 fell 1.9%.
Asian markets ended sharply lower. The Shanghai Composite plunged 3%, the Hang Seng in Hong Kong shed 2% and Japan's Nikkei declined 1.5%.
Preliminary data released Monday showing Chinese manufacturing dropped to a 10-month low in May only added to the selling pressure, as investors continued to worry about global growth, said Jones.
Commodities: Oil for July delivery fell $2.40 to settle at $97.70 a barrel.
Gold futures for June delivery rose $6.50 to $1,515.40 an ounce.
Bonds: The price on the benchmark 10-year U.S. Treasury jumped, pushing the yield down to 3.13% Monday from 3.15% late Friday.
Companies: Shares of entertainment products maker Sony (SNE) slipped nearly 4%. The company posted a $3.19 billion annual loss and cut its full-year earnings outlook to reflect damages of the earthquake and tsunami in Japan.
Shares of Krispy Kreme (KKD) jumped more than 20% after the doughnut maker beat earnings per share by 4 cents on strong sales. 
| Index | Last | Change | % Change |
|---|---|---|---|
| Dow | 32,627.97 | -234.33 | -0.71% |
| Nasdaq | 13,215.24 | 99.07 | 0.76% |
| S&P 500 | 3,913.10 | -2.36 | -0.06% |
| Treasuries | 1.73 | 0.00 | 0.12% |
| Company | Price | Change | % Change |
|---|---|---|---|
| Ford Motor Co | 8.29 | 0.05 | 0.61% |
| Advanced Micro Devic... | 54.59 | 0.70 | 1.30% |
| Cisco Systems Inc | 47.49 | -2.44 | -4.89% |
| General Electric Co | 13.00 | -0.16 | -1.22% |
| Kraft Heinz Co | 27.84 | -2.20 | -7.32% |
| Overnight Avg Rate | Latest | Change | Last Week |
|---|---|---|---|
| 30 yr fixed | 3.80% | 3.88% | |
| 15 yr fixed | 3.20% | 3.23% | |
| 5/1 ARM | 3.84% | 3.88% | |
| 30 yr refi | 3.82% | 3.93% | |
| 15 yr refi | 3.20% | 3.23% |
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